A:

Governments may make policy changes in response to economic conditions. Government regulation of the economy is frequently used to engineer economic growth or prevent negative economic consequences. During periods of weak growth, Keynesian economists recommend lowering interest rates to encourage borrowing and restore economic growth. In response to inflation concerns, governments may decide to increase interest rates. Government policies may use tax incentives to direct economic conditions also. The active use of these strategies demonstrates government interest in preserving particular economic circumstances to further the economic well-being of important stakeholders and the public.

In the United States, the Federal Reserve Bank has the authority to direct economic policy for the country as a whole. Established in 1913, the Federal Reserve controls the money supply and actively uses policy to respond to and influence economic conditions. Increasing or decreasing available funds influences bank behavior. Banks are offered a discount rate by the Federal Reserve on funds borrowed to re-lend to consumers and industry clients. Changing the costs of borrowing by changing rates is another means of directing bank activity. Major banks have tremendous influence on the consumer economy because they are gatekeepers. Funds flow from the Federal Reserve to the major banks and the government actively uses this means to direct the economic rate of growth.

Outside events may influence economic activity and governments may use economic means to enact changes. Tax policy is frequently used to direct economic action, as is legislation. Government responses to economic conditions typically include using multiple strategies simultaneously.

RELATED FAQS
  1. What's the difference between monetary policy and fiscal policy?

    Discover the distinctions between these two tools designed to influence national economies. Read Answer >>
  2. What precise measures are implemented in most monetary policies?

    Read about some of the precise measures implemented in most monetary policies, and learn why monetary policy is considered ... Read Answer >>
  3. Why would the Federal Reserve change the reserve ratio?

    Understand the Federal Reserve's monetary policy and the tools it uses to change that monetary policy. Learn about the reserve ... Read Answer >>
  4. What are some different kinds of expansionary policy?

    Learn the most popular types of expansionary policy used by the federal government and the Federal Reserve to increase the ... Read Answer >>
  5. What are the different groups involved in corporate governance?

    Learn about the challenges inherent to defining and executing corporate governance, and understand why different groups work ... Read Answer >>
  6. Who determines interest rates?

    In countries using a centralized banking model, interest rates are determined by the central bank. In the first step of interest ... Read Answer >>
Related Articles
  1. Insights

    What is Fiscal Policy?

    Learn how governments adjust taxes and spending to moderate the economy, also known as Fiscal Policy.
  2. Personal Finance

    How the Federal Reserve Affects Your Mortgage

    The Federal Reserve can impact the cost of funds for banks and consequently for mortgage borrowers when maintaining economic stability.
  3. Insights

    How Much Influence Does The Fed Have?

    Find out how current financial policies may affect your portfolio's future returns.
  4. Investing

    The Difference Between Finance And Economics

    Learn the differences between these closely related disciplines and how they inform and influence each other.
  5. Insights

    How Governments Influence Markets

    The biggest influence in the markets today can create some unintended consequences.
  6. Insights

    Fiscal Vs. Monetary Policy Pros & Cons

    When it comes to influencing macroeconomic outcomes, governments have typically relied on one of two primary courses of action: monetary policy and fiscal policy.
  7. Insights

    The Federal Reserve

    As an investor, it's important to understand exactly what the Fed does and how it influences the economy.
RELATED TERMS
  1. Economic Conditions

    The state of the economy in a country or region. Economic conditions ...
  2. Limited Government

    A political system in which legalized force is restricted through ...
  3. Economic Growth Rate

    A measure of economic growth from one period to another in percentage ...
  4. Fiscal Policy

    The use of government spending and tax policies to influence ...
  5. Monetary Policy

    Monetary policy is the actions of a central bank, currency board ...
  6. Economic Stimulus

    Attempts by governments or government agencies to financially ...
Hot Definitions
  1. Gross Domestic Product - GDP

    GDP is the monetary value of all the finished goods and services produced within a country's borders in a specific time period, ...
  2. Debt/Equity Ratio

    The D/E ratio indicates how much debt a company is using to finance its assets relative to the value of shareholders’ equity.
  3. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange.
  4. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  5. Return On Equity - ROE

    The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability ...
  6. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
Trading Center